The Concept of Reverse Charge under GST


What is Revere Charge?
The supplier of Goods generally pays the Tax on supply but on occasion when the reciever/ purchaser becomes liable to pay taxes, such a condition is termed as reverse charge.

Need of reverse Charge

The concept of reverse charge under GST came into force to increase tax compliance and tax revenues. The earlier taxation system was unable to collect service tax from various unorganized sectors like goods, transport etc.

Lets Summarize an example in Normal & Reverse Charge scenario
For Example: When a Supplier say Company A has provided services to another Company B. Bill charged= Rs. 1,00,000 and Tax liability (assumption) = Rs. 18,000 (Rs. 1,00,000*18%)

Normal mechanism of taxation procedure (GST)

When the Company A ( supplier ) sends a bill of Rs. 1,00,000 mentioning that the GST will be borne by the receiver.Then company B will pay Rs. 1,00,000 + GST of Rs. 18,000( GST)= 118000 to the Company A. Then Company A being a registered supplier will pay Rs 18,000 as GST to the government.

Reverse Charge Mechanism of (GST)

In case of reverse charges, Company B will pay the cost of goods of Rs 1,00, 000 to Company A and the GST of Rs 18, 000 will be paid by Company B (purchaser/ reciever ) to the government as company A is not registered under GST. In such cases, the registered purchaser is liable to pay GST on reverse charge basis for such supply.

Goods under reverse charge mechanism

  • Cashew nuts, not shelled or peeled by agriculturist to any registered person
  • Bidi wrapper leaves ( tendu) by any agriculturist to any registered person
  • Tobacco leaves by an agriculturist to any registered person
  • Supply of lottery by any State Government, Union territory or any local authority to Lottery distributor or selling agent
  • Any person who manufactures silk yarn from raw silk or silk worm cocoons for supply of yarns to any registered person

Time Of Supply For Goods Under Reverse Charge
There are different provisions which are considered under reverse charges and earliest time of supply will be considered . For example if the goods are received on 18 th may 2017, the date of payment was 18 th May 2017, date of invoice is 2 nd June 2017 and the date of entry in the book of recipient is 20 th May 2017.

In such a condition , Time of supply will be considered as 20th May 2017 and if the supply date could not be determined it will be considered as 20 th May 2017, i.e. Date of entry.

Is reverse charge applicable on Purchases up to Rs. 5,000 daily?
There is a condition wherein any purchases made from unregistered suppliers will not attract GST.This condition is when the purchaser is buying goods up to Rs 5000, no reverse charge will be applicable.

In this scenario, Reverse charge is only applicable when the unregistered suppliers are supplying goods above Rs. 5,000.

For example: Say Company C, a registered company Purchases goods worth Rs. 8000 from Company B. Here the purchaser C should pay GST as the unregistered supplier has supplied goods above Rs 5000?

As per rule as the limit of Rs. 5,000 in a day is crossed, the GST will be payable on the entire amount of Rs. 8000. So if any expenses which are above Rs 5000 will be required to pay GST on these transactions under RCM.

Services under Reverse charge mechanism

  • Goods transport agencies providing services to any factory, society, co-operative society, body corporate.
  • Legal services by any advocate to any business entity located in the taxable territory.
  • Service supplied by any insurance agent to any person carrying business, located in the taxable territory.
  • Services supplied by a recovery agent to a banking company or a financial institution
  • Supply of services by an author or music composer, photographer located in the taxable territory

The Time Of Supply in case of Services
When it comes to services the reverse charges that will be the earliest and considered will be the date of payment or the date immediately after sixty days from the date of issue of invoice by the supplier.When not possible to determine the time of supply , the time of supply considered will be the date of entry in the books of account of the recipient.

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